Let AI pick your perfect Self-Directed solution! Try Our AI Tool Today!

IRA Financial Blog

The Best Solo 401(k) Saving Tips to Retire Wealthy

What is the best way to save money to retire

Saving for Retirement

In this article, we provide Solo 401(k) saving tips that can help you retire early. Social security will never go bankrupt, but according to an article by AARP, social security trust funds will likely run out of cash reserves by 2034. Furthermore, you should never rely on social security to fund your retirement years – it simply isn’t enough money to live comfortably.

Key Points
  • The Solo 401(k) is the best plan for the self-employed
  • Take advantage of high contributions limits, Roth sub accounts and the loan feature
  • Learn why IRA Financial is the place to go for setting up your new plan

Saving with a Solo 401(k)

Being a self-employed individual comes with many advantages. Yet one crucial disadvantage is the lack of retirement savings options. Being self-employed, you cannot contribute to a workplace retirement plan, but you can establish an individual retirement account, such as the SEP IRA.

SEP stands for Simplified Employee Pension. It is an individual retirement account for small business owners and self-employed individuals and has no immediate tax requirements.

Like the case of a traditional IRA, you benefit from tax-deferral, which essentially means you pay when you take a distribution at the age of retirement. The SEP IRA is a good retirement plan for self-employed individuals; however, it cannot compete with Solo 401(k).

Related: Best Solo 401(k) Investments

What is a Solo 401(k)?

Before we get into Solo 401(k) saving tips, it is important to know what this retirement plan can offer. Also called the One-Participant 401(k), Individual 401(k) and Self-Employed 401(k), it is a retirement savings vehicle for self-employed and small business owners with no full-time employees. You are not eligible to establish a Solo 401(k) you do not meet the requirements, which are the absence of full-time employees if you are a small business owner and you generate self-employment income.

It is similar to a traditional 401(k). As a participant, you make contributions into your plan with pretax income. From there, you can make a variety of investments to grow the funds in your 401(k), completely tax-deferred. However, with a Solo 401(k), you act as both employer and employee and can set aside money as both. In fact, the plan has the highest maximum contributions than any retirement plan, allowing you to save more prior to retirement.

Related: Fighting Inflation with a Solo 401(k)

Solo 401(k) vs SEP IRA

As an employee, you can make an elective-deferral contribution. As an employer, you can make a profit-sharing contribution, which allows the business to make contributions toward the plan. In the case of the SEP IRA, you will not be able to make a contribution as an employee, which eliminates the elective-deferral, also known as the employee deferral. Additionally, the Solo 401(k) plan is more cost-effective and easier to administer than the SEP IRA.

The “Golden Key” is to Start Young

No matter what retirement account you choose to establish, it’s important that you start young. Adam Bergman, founder of IRA Financial says that taking advantage of your age is one of the golden keys to help you create retirement wealth.

Let’s see that in action with the Solo 401(k) Plan.

Meet Mary Jaze

Mary Jaze is 25 and the owner of MJ’s Treats, an upscale vegan bakery. Her business is doing better than she ever imagined, and now she wants to establish a retirement plan to save for her future. Although she knows the benefits of using retirement funds to make investments, Mary Jaze does not want to invest solely in the stock market.

Being a small business owner with zero full-time employees, she chooses the Solo 401(k) plan. After watching Using a Solo 401(k) Plan to Invest in Real Estate, she now wants to use her retirement account funds to make real estate investments.

Each month, she sets aside $1,000 for her Solo 401k. That’s $12,000 a year. Let us assume she does this every month until retirement age: 70 1/2.

Current Age: 25

Starting Solo 401(k) Balance: $0

Expected Rate of Return: 7%

If MJ goes along this path until she’s 70 1/2, she will have $3,197,037 with a pre-tax Solo 401(k). That’s retirement wealth in a nutshell.

Let us assume Mary Jaze began saving for her retirement at a later age: 50. What would those numbers look like?

Current Age: 50

Starting Solo 401(k) Balance: $0

Expected Rate of Return: 7%

If she goes along this path until the age of 70 1/2, she will have $487,539 with her pretax Solo 401(k).

Numbers don’t lie. When you start investing early for your retirement, you will achieve retirement wealth. It’s important to note that although starting young is important, you must be consistent with the annual contributions you make to the retirement plan.

If you’re self-employed or a small business owner and you don’t know which plan is right for you, take these Solo 401(k) Saving Tips into consideration.

Related: How to Choose the Best Solo 401(k) Provider

IRA Financial

IRA Financial was created to help retirement account holders take control over their IRA. Founder, Adam Bergman, noticed that many account holders were not aware they could self-direct their retirement account. IRA Financial gives clients the freedom to invest in almost any time of investment.

With nearly a decade of experience, the team of tax and ERISA specialists have helped 25,000 clients invest over $5 billion in alternative assets.

When you’re ready to self-direct your retirement account, such as a Solo 401(k), contact IRA Financial to get you started.


Latest Content

Send Us a Message!